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Ringgit drops to six-year low as Fed stance to cut bond appeal

[KUALA LUMPUR] The ringgit fell to a six-year low as investors brace for an increase in US interest rates that will diminish the appeal of Malaysia's higher bond yields.

The extra yield investors demand to hold Malaysia's dollar notes due in 2016 over similar-maturity Treasuries rose to the widest in 20 months Monday as local bond rates climbed. A US report on Friday showing the jobless rate dropped to the lowest in almost seven years prompted funds to raise bets for tightening by the Federal Reserve as soon as June, while Malaysia has kept borrowing costs on hold since July as oil prices plunged.

"The hiking of Fed interest rates has a clear impact on emerging markets," said Nizam Idris, Singapore-based head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. "As the Fed hikes rates," the attraction of Malaysia's yields will decrease, he said.

The ringgit declined 0.7 per cent to 3.7040 a dollar in Kuala Lumpur and earlier fell to 3.7075, the lowest since March 2009, data compiled by Bloomberg show. The currency has lost 2.1 per cent in the past five days.

One-month implied volatility, a measure of expected exchange-rate swings used in pricing options, fell five basis points, or 0.05 percentage point, to 11.02 per cent after reaching 11.22 per cent, the highest since Jan 22.

Global funds cut holdings of Malaysian sovereign and corporate debt by 3 per cent to RM219 billion (S$81 billion) in January from the previous month, the lowest level since August 2013, the latest central bank data show.

Bank Negara Malaysia left its benchmark interest rate unchanged for a fourth straight meeting last week as the ringgit's weakness reduced scope for any easing.

The difference in yield between Malaysia's dollar bonds due in July 2016 and US debt widened to 88 basis points Monday, the most since July 2013, data compiled by Bloomberg show. It was at 85 on Tuesday.

The yield on the Southeast Asian nation's 10-year local- currency government bonds rose two basis points to 3.98 per cent, the highest since Jan 13. It rose four basis points Monday, when similar-maturity Treasury yields dropped five basis points to 2.19 per cent.

BLOOMBERG